Key Points
- Big Tech’s impressive AI-related profits are largely fueled by massive spending from money-losing AI startups.
- Companies like OpenAI and Anthropic are losing billions of dollars as they build and train their AI models.
- In the third quarter, OpenAI’s implied loss of over $12 billion was equivalent to 65% of the combined earnings growth of five major tech companies.
- The entire system relies on investors continuing to fund these huge losses in the hope that AI will eventually become profitable.
Investors are feeling good about Big Tech’s strong earnings, especially amid growing concerns about an AI bubble. But there’s a troubling side to these profits: the massive losses at the generative AI startups that are spending a fortune on chips and data centers from these same profitable public companies.
Companies like Nvidia, Alphabet, Amazon, and Microsoft have seen their quarterly profits soar as AI-related revenue floods in. A lot of this money comes from selling AI services to businesses, but a big chunk also comes from being a supplier to, or an investor in, the private companies building the AI chatbots we hear so much about. These startups are losing money as fast as they can raise it, and they plan to keep doing so for years.
OpenAI and Anthropic are the two biggest names in generative AI, and their founders, Sam Altman and Dario Amodei, have become tech celebrities. What’s becoming clear, however, is that these companies are also giant money pits. The losses they are racking up are the flip side of the huge profits being reported by the big public tech companies.
For this cycle to continue, two things need to happen. First, the AI developers have to create products that are successful enough to cover their massive costs. Second, investors need to keep pouring money into these companies to finance their losses until they become profitable. OpenAI alone estimates it will need over $150 billion.
It’s a huge bet. The chatbots are impressive, but they still make basic mistakes, have security holes, and sometimes just make things up. Even their creators don’t expect to turn a profit for a long time—OpenAI is aiming for 2030, and Anthropic for 2028.
In the meantime, the losses are staggering. Microsoft’s share of OpenAI’s third-quarter loss suggests the startup lost over $12 billion in just three months. That loss is equivalent to 65% of the combined earnings growth of Microsoft, Nvidia, Alphabet, Amazon, and Meta.
A lot of OpenAI’s spending goes to its highly paid engineers, but a huge amount also goes to renting Nvidia chips from Microsoft’s cloud service. OpenAI has committed to spending $250 billion more on Microsoft’s cloud, as well as on massive deals with Oracle, CoreWeave, and Amazon.
In the current frenzy, investors seem to have forgotten the old saying: “Revenue is vanity, profits are sanity, cash is reality.” If the excitement around AI cools or these startups struggle to make sales, investors might start focusing on the insane losses rather than the flashy revenue numbers. At that point, the fact that the cash flowing from these startups is propping up Big Tech’s earnings will become painfully clear.
